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Lend Academy's Peter Renton on How Any Investor Can Diversify with Peer-to-Peer Lending

The world of finance as we know it is changing rapidly, with a wave of equity crowdfunding, micro-finance, and loca-vesting threatening to permanently alter whole swaths of a capital market that has changed relatively little since 1933. And one area that’s catching fire faster than almost any other is Peer-to-Peer (P2P) lending.

By using web-based platforms to connect borrowers directly to lenders, P2P lending sites have created a new option for reputable borrowers to seek out funds. But, possibly more interesting, is the new investment opportunity it has created for lenders.

Lending on P2P sites can provide a safe, diversified avenue to solid returns. Peter Renton, the founder of Lend Academy, is at the forefront of this movement. His site and blog helps educate the general public about the opportunities for investors held in P2P lending.

Peter spoke with Equities.com about getting started in P2P lending and how investors can diversify their investment portfolios with a whole new field.

EQ: So, if you’re a retail investor who’s looking to diversify your retirement portfolio and want to dip a toe into P2P lending, what practical advice would you have? What should you be looking for in that early going as you just break into it?

Renton: First off, it behooves every investor to do research. You can start on lendacademy.com, which offers good supplemental research and has some great information for new investors. There are other useful sites such as LendingMemo.com and NickelSteamroller.com where investors can learn a great deal. I think the more time that you spend researching, the more likely you are to make good decisions, and that’s what it comes down to.

Secondly, you can start out small. This is what I did and I recommend everybody else do as well. That’s the great thing about investing on these platforms, you can start out with less than $1,000 if you want. I started out with $500, it allows you to get your feet wet. You can go in, you can look at these loans, [and] get a feel for what they offer.

Another really important thing to remember when you’re dipping your toe in, is not to do what I did. I started with $500 and invested $250 in two loans. I did A-grade loans, thinking “Oh, they’re A-grade loans. They won’t default.” Well, even A-grade loans default occasionally, and one of those loans ended up going late. I didn’t end up losing my money, but it was just a good lesson for me – to really be aware of the most important success factor: diversification.

If you’re investing $500, then you should really invest in 20 loans of $25 each. That’s going to get you the most diversification. And even that isn’t ideal, because if one of those loans defaults, right away you’ve lost 5% of your investment. Which is going to be hard to recover from.

If it’s at all possible, start off with $2,500 and do a hundred loans. But to be fully diversified, I think you need at least $5,000. But that’s a lot of money for many investors and I don’t want to discourage people. So even $500, 20 loans at $25 each, is a nice way to start.

EQ: When you’re considering specific loans, what are you looking for? Are there specific red flags you try to avoid?

Renton: There aren’t any red flags, necessarily, because, to be approved for these platforms, the loans have been vetted pretty closely by Lending Club and Prosper. If there’s a red flag, the loan is removed from the platform.

If you go and just build a portfolio of the highest interest loans, that’s probably not a very good idea initially. These loans are graded from lowest interest-lowest risk to highest interest-highest risk. So it’s good to not focus just on the highest-risk loans initially.

There are some things that I like to look out for, like good income. That’s something that you can filter for. Somebody that has $40,000 a year income can still get approved on this platform for a $10,000 loan, and that could still end up being a decent investment. But personally, I like to have people with a pretty large buffer that comes with higher income. I typically like more than $50,000 in annual income, although $75,000 is even better, and $100,000 is better still.

The other thing I like to look for is number of credit inquiries on a credit report. If someone has got zero inquiries on their report that tells me they’re not out shopping for credit. They haven’t applied for a credit card in the six months. Whenever you apply for a credit card, a car loan or a home loan — it shows up your credit report as a “hard inquiry.” If someone has three or four inquiries on their credit report, that means they’re shopping for credit.

Now having said that, the platforms will adjust for this and will penalize borrowers with many inquiries with a higher interest rate. Regardless, one of the things I like to recommend to new investors is to look for people that aren’t shopping for credit. This means zero inquiries. If you look for zero inquiries and high income, you’re going to reduce your pool of potential borrowers, but, if you’re just getting started, these are two factors that can help reduce your risk.

EQ: For those investors who are more accustomed to passive asset management—who tend to invest in ETFs or mutual funds—what products are available that package loans and won’t require them to shop around as specifically?

Renton: If you’re an accredited investor, you’ve got lots of options. There are lots of funds out there right now. My company has one. There are probably another 10 or 12 private funds offering accredited investors access to this kind of investment. That’s going to be your most passive avenue.

Now, if you’re non-accredited—and a vast majority of the population is non-accredited—unfortunately there is no mutual fund available today. This will happen probably in the next 12 or 18 months, but today that vehicle is simply not available.

Now, what you can do is you can open an account at Lending Club or Prosper. Both of these platforms have automated investing available that is relatively simple to setup. You can look for to their online help or you can go to Lend Academy and learn how to do it. This is the best way for investors to create a passive investment strategy. There’s going to be a little bit of a process to get it set up, but once you’re done you really can set it and forget it.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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